Monday, May 15, 2017

Some Pointers to India’s Revised IIP and WPI 

In recent times, IIP, the high-frequency indicator of factory output, has been showing far more muted and volatile growth than the manufacturing component of GDP. The WPI (wholesale price index) measure of inflation has also shown unusual divergence from the CPI (consumer price index), differing not only in magnitude but also in direction. The composition of the basket of goods is decided, in the case of the IIP, which tracks production, based on traded volumes of goods in the base year. In the case of WPI, it is based on the volume of goods consumed in the base year. Weights are also assigned to individual items as well as the groups, based on the net traded value (the total transactions in a product) in the base year.  The government has released the new series of WPI and IIP under which the base year for calculating the macroeconomic indicators has been revised to 2011-12, from the 2004-05 earlier. The new series is expected to capture the deep structural change in the Indian economy and better reflect contemporary market realities. The revisions are based on the recommendations of a working group headed by Saumitra Chaudhuri (then Member of the Prime Minister’s Economic Advisory Council constituted by Manmohan Singh as well as Member, Planning Commission).  
The new IIP now measures output for the basket of goods produced in base year 2011-12 instead of 2004-05. It has been updated by introducing 149 new items into manufacturing, while removing 124 obsolete ones. The number of items in the basket of goods is now 809 (in 407 item groups) against 620 items (in 399 item groups) in the old series. The index is now more broad-based, includes renewable energy, and introduces a new sub-group — infrastructure and construction, reflecting the growing importance of the infrastructure and construction sector in the economy. This will significantly trim the weight of consumer products in the IIP and add to the weight of industrial goods. The capital goods, data will capture ‘work in progress’, on the recommendation of the Chaudhuri working group, which had noted that in the case of heavy machinery and other capital goods, the production may take several months and is reported only in the month when it is completed, causing high volatility in reported data. The decision to count work in progress is expected to smooth out the wild swings in this sub-index. The switch to a new base year and basket of goods are expected to reduce the dissonance with GDP data; however, divergences will remain as IIP by definition measures production in the organised sector, while GDP tracks value added and also covers the unorganised sector.
The revised WPI basket has 697 items against 676 earlier. The updating of base year to 2011-12 from 2004-05 has led to 199 new items being added to and 146 deleted from the basket. So far, the WPI was calculated as producer price plus indirect taxes minus trade discount. A major alteration is the exclusion of indirect taxes while compiling WPI. This exclusion removes the impact of fiscal policy on prices and brings it closer to a producer price index (PPI) in line with global best practices. This would also ensure that no further changes are required during the soon-to-be introduced GST regime. The dissemination of a new food index should be of considerable utility to households, agriculturists and policymakers. Both the IIP and WPI items will now be reviewed on an annual basis by a technical review committee.
Though the new series of GDP, IIP, WPI and CPI are expected to better reflect the true trends in the economy academicians have expressed severe doubts on the quality of data given the nature of ground staff employed in gathering data and the approximations made from small samples lacking use of modern sources in the era of big data.

Tuesday, May 9, 2017

Budget 2017-18 highlights

Following are the Highlights of the Union Budget for 2017-18
Introductory Remarks
Budget 2017-18 contains 3 major reforms: advancement of date of presentation, merger of railway budget with general budget, abolition of Plan and non-Plan expenditure.
Pace of remonetization will soon reach comfortable levels; effect of demonetization not expected to spill over into next year. Surplus liquidity in banking system will raise access to credit, leading to multiplier effect on economic activity.
Agenda for 2017-18 is “Transform, Energise and Clean India” through 10 themes:
Farmers : committed to double the income in 5 years;  Rural Population : providing employment & basic infrastructure;  Youth : energising them through education, skills and jobs;  The Poor and the Underprivileged : strengthening the systems of social security, health care and affordable housing;  Infrastructure: for efficiency, productivity and quality of life;  Financial Sector : growth & stability by stronger institutions;  Digital Economy: for speed, accountability and transparency;  Public Service : effective governance and efficient service delivery through people’s participation;  Prudent Fiscal Management: to ensure optimal deployment of resources and preserve fiscal stability;  Tax Administration: honouring the honest.

Fiscal situation
*       Total expenditure is Rs. 21, 46,735 crore.
*       Plan, non-plan expenditure to be abolished; focus will be on capital expenditure, which will be 25.4 %.
*       Rs. 3,000 crore under the Department  of Economic Affairs for implementing the Budget announcements.
*       The defence sector gets an allocation of Rs. 2.74,114 crore.
*       Expenditure for science and technology is Rs. 37,435 crore.
*       Total resources transferred to States and Union Territories is Rs 4.11 lakh crore.
*       Revenue deficit is 1.9 %
*       Fiscal deficit of 2017-18 pegged at 3.2% of the GDP. Will remain committed to achieving 3% in the next year.
*       Net market borrowing of Government restricted to Rs. 3.48 lakh crores after buyback in 2017-18, compared with Rs. 4.25 lakh crores of the previous year.
*       Food subsidy estimated at 1.45 lakh crore rupees in 2017-18 versus 1.35 lakh crore rupees revised estimate for 2016-17.
*       Fuel subsidy seen at 25,000 crore rupees in 2017-18 versus 27,500crore rupees revised estimate for 2016-17.
*        Fertiliser subsidy seen unchanged in 2017-18 at 70,000 crore rupees.
*        Federal government's pension liabilities seen at 1.31 lakh crore rupees in 2017-18 versus 1.28 lakh crore rupees revised estimate for 2016-17.
*        Budget allocation to health seen at 48,900 crore rupees in 2017-18 versus revised estimate of 39,900 crore rupees in 2016-17.
*       Interest payments at Rs. 523078 crore in 2017-18 against Rs. 483069 crore in 2016-17.

Tax proposals
*       India’s tax to GDP ratio is not favourable and there are several anomalies: Out of 13.14 lakh registered companies, only 5.97 lakh firms have filed returns for 2016-17; individuals numbering 1.95 crore showed an income between Rs. 2.5 lakh to Rs. 5 lakh; out of 76 lakh individual assessees declaring income more than Rs. 5 lakh, 56 lakh are salaried; only 1.72 lakh people showed income of more than Rs. 50 lakh a year; between November 8 to December 30, deposits ranging from Rs. 2 lakh and Rs. 80 lakh were made in 1.09 crore accounts.
*       Proportion of direct tax to indirect tax is not optimal.
*       Under the corporate tax, in order to make MSME companies more viable, there is a proposal to reduce tax for small companies with a turnover of up to Rs 50 crore to 25%. About 67 lakh companies fall in this category. 96% of companies to get this benefit.
*       The government proposes to reduce basic customs duty for LNG to 2.5% from 5%.
*      Proposal to have a carry-forward of MAT for 15 years.
*      Holding period for long-term capital gains tax on immovable property reduced from 3 to 2 years; base year indexation shifted from 1.4.1981 to 1.4.2001.
*       Capital gains tax to be exempted for persons holding land from which land was pooled for creation of the state capital of Andhra Pradesh.
*       The limit of cash donation by charitable trusts is reduced to Rs 2,000 from Rs 10,000.
*       Actual revenue loss on tax proposals Rs 22,700 crore; gain from additional resource mobilisation is Rs 2,700 crore 
*       Net revenue loss in direct tax could be Rs. 20,000 crore.

Personal income tax
*       Existing rate of tax for individuals between Rs.  2.5- Rs 5 lakh is reduced to 5% from 10%.
*       All other categories of tax payers in subsequent brackets will get a benefit of Rs 12,500.
*       10 % surcharge on individual income above Rs. 50 lakh and up to Rs 1 crore to make up for Rs 15,000 crore loss due to cut in personal I-T rate.
*       15 surcharge on individual income above Rs. 1 crore to remain.
*       Rate of growth of advance tax in Personal I-T is 34.8% in the last three quarters of this financial year.
*       The Income Tax Act to be amended to ensure that no transaction above Rs 3 lakh is permitted in cash.

Infrastructure and Railways   
Ø  A total allocation of Rs. 39,61,354 crore has been made for infrastructure.
Ø  For transportation sector as a whole, including rail, roads, shipping, provision of Rs. 2,41,387 crore has been made in 2017-18.
Ø  Total allocation for Railways is Rs. 1,31,000 crore.
Ø  No service charge on tickets booked online through IRCTC.
Ø  Corpus of Rs. 1 lakh crore for five years for passenger safety.
Ø  Railways to partner with logistics players for front-end and back-end solutions for select commodities.
Ø  Railways will offer competitive ticket booking facility.
Ø  New Metro rail policy will be announced with new modes of financing.
Ø  Rs. 64,900 crore allocated for highways.
Ø  A DigiGaon initiative will be launched to provide tele-medicine, education and skills through digital technology.
Ø  Trade Infrastructure for Export Scheme (TIES) will be launched in 2017-18.
Ø  A strategic policy for crude reserves will be set up.

Agriculture, Poverty and Health
*       A sum of Rs. 10 lakh crore is allocated as agricultural credit. Farmers to also benefit from 60 days interest waiver announced on 31 Dec 2016. Agriculture sector is expected to grow at 4.6%.
*       Long Term Irrigation Fund already set up in NABARD to be augmented by 100% taking the total corpus to Rs. 40,000 crores. A dedicated micro irrigation fund will be set up for NABARD with Rs 5,000 crore initial corpus.
*       National Agricultural Market (e-NAM) to be expanded from 250 markets to 585 APMCs. Assistance up to Rs. 75 lakhs will be provided to every e-NAM.
*       Dairy processing infrastructure fund wlll be initially created with a corpus of Rs. 2000 crore.
*       Over Rs 3 lakh crore will be spent for rural India. MGNREGA to double farmers' income.
*       MGNREGA allocation to at Rs. 48,000 crores in 2017-18.
*       Technology will be used in a big way to ensure MGNREGA works.
*       During 2017-18, five lakh farm ponds will be be taken up under the MGNREGA.
*       The government targets to bring 1 crore households out of poverty by 2019.
*       The government proposes to complete 1 crore houses for those without homes.
*       Affordable housing will be given infrastructure status.
*       Will allocate Rs. 19,000 crore for Pradhan Mantri Gram Sadak Yojana in 2017-18.
*       The country well on way to achieve 100% rural electrification by March 2018.
*       Swachh Bharat mission has made tremendous progress; sanitation coverage has gone up from 42% in Oct 13 to 60% now.
*       Allocation of  Rs. 4000 crores  for Skill Acquisition and Knowledge Awareness for Livelihood Promotion programme (SANKALP) to provide market relevant training to 3.5 crore youth.
*       Allocation of Rs. 500 crores to provide support services for empowering rural women with opportunities for skill development, employment, digital literacy, health and nutrition.
*       Total allocation for Rural, Agriculture and Allied sectors is Rs. 187223 crores.

Financial sector
Ø  FDI policy reforms - more than 90% of FDI inflows are now automated.
Ø  Foreign Investment Promotion Board will be abolished.
Ø  An expert committee for creation of an operational and legal framework to integrate spot market and derivatives market in the agricultural sector, for commodities trading. e- NAM to be an integral part of the framework.
Ø  A new ETF with diversified CPSE stocks and other Government holdings will be launched in 2017-18.
Ø  Shares of Railway PSE like IRCTC will be listed on stock exchanges.
Ø  Bill on resolution of financial firms will be introduced in this session of Parliament.
Ø  Revised mechanism to ensure time-bound listing of CPSEs.
Ø  Computer emergency response team for financial sector will be formed.
Ø  Rs 10,000 crore for recapitalisation of banks will be providedin 2017-18.
Ø  Pradhan Mantri Mudra Yojana lending target fixed at Rs 2.44 lakh crore for 2017-18.
Ø  Digital India The government will introduce two schemes to promote BHIM App - referral bonus for the users and cash back for the traders.
Ø  Negotiable Instruments Act might be amended.
Ø  For big-time offences - including economic offenders fleeing India, the government will introduce legislative change or introduce law to confiscate the assets of these people within the country.
Ø  No transaction above Rs. 3 lakh would be permitted in cash subject to certain exceptions.
Ø  A Mission will be set up with a target of 2,500 crore digital transactions for 2017-18 through UPI, USSD, Aadhar Pay, IMPS and debit cards.
Ø  The maximum amount of cash donation for a political party will be Rs. 2,000 from any one source. Political parties will be entitled to receive donations by cheque or digital mode from donors. An amendment is being proposed to the RBI Act to enable issuance of electoral bonds .A donor can purchase these bonds from banks or post offices through cheque or digital transactions. They can be redeemed only by registered political parties.